Report on State of Financial Inclusion in Kerala With generous support from www.themix.org i Author: Tara Nair Professor, Gujarat Institute of Development Research Editors: Amar Samarapally Financial Inclusion Lead, Asia and the Pacific Devanshi Patani Financial Inclusion Analyst, Asia and the Pacific Lara Storm Director, Financial Inclusion Nikhil Gehani Marketing and Communications Manager Sachin Hirani Regional Manager, Asia and the Pacific Designer: M V Rajeevan Graphic Designer MIX provides data, analytics, and insights that empower decision makers to build an inclusive financial services ecosystem. As basic infrastructure for responsible and inclusive markets, our MIX Market and FINclusion Lab platforms enable and inspire coordinated investment, effective policy, and positive social outcomes for the financially underserved. Each year 750,000 website visitors access MIX’s data, analysis, and market insights. Disclaimer: This publication is available for use in research and analysis. Data and content may only be used for non-commercial purposes. If the material is published or distributed, it should be attributed to MIX with the appropriate citation. MIX has taken due care and caution in preparing this report, it has obtained the information from the institutions. Thus MIX relies on the information submitted and does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors in transmission. ii Acknowledgement MIX would like to thank National Bank for Agriculture and Rural Development (NABARD), Kerala for conducting two stakeholder workshops in Kerala which helped different entities involved in financial inclusion assemble at one platform and exchange their thoughts. It helped MIX in gaining cognizance of the unique way in which Kerala tries to achieve financial inclusion. iii Executive Summary In India, just over half of all adults have access to a bank account. However, the rate of access to finance varies – sometimes greatly – between states. Kerala has often been cited for its progress in this regard, with the government declaring in 2014 that this southern state had reached full financial inclusion. However, just as there is great variation in financial access between states, there are also differences within states. Beyond the unique achievements made by Kerala at the macro level, there are underlying spatial patterns and trends that need to be uncovered carefully. Some of these patterns may be unique to the state’s social and economic milieu. But there could be others that can act as useful guidance to other states in their efforts to build inclusive financial services. This report digs deep into the MIX Workbook to identify these patterns by analyzing coverage by institution type, the market share of different types of banks, the spread of ATMs and bank branches, the coverage ratio of all financial service providers, and several other indicators of supply and demand. Through the Model State Data Platform initiative, MIX has highlighted the factors that lead to financial inclusion of states at the district, taluka and village levels. By building a platform with geographic granularity that brings together a range of financial service providers and their products and services – not restricted to traditional bank accounts – this report hopes to assist stakeholders to realistically assess the coverage of financial services and to devise evidence-based strategies to accelerate financial inclusion. iv Contents 1.Introduction 1 1.1. Measuring Financial Inclusion: Initiatives by MIX 2 1.2. MIX’s Model State Data Platform 2 2. Model Data Platform for Kerala 3 2.1. Kerala: A Strong Foundation in Financial Services 3 3. Patterns of Financial Inclusion in Kerala: Working through the Workbook 4 3.1. Supply of Financial Services – Public Sector Banks Dominate 4 3.2. From Understanding Spread of Access Points to Assessing Coverage 8 3.2.1. Coverage of Financial Services: View across Districts 9 4. Lopsided Banking Business 11 4.1. Public Sector Banks have Larger Credit and Deposit Share 12 4.2. Predominance of Deposit Accounts 13 4.2.1. The Downside of High CDRs 14 5. Important Correlates of Financial Inclusion 15 5.1. Digging Deeper: Going beyond Districts 18 5.2. Choosing between Measures 19 Conclusion 20 Notes and References 21 Appendices 22 Appendix I: Supply-Demand Relationships Table 22 Appendix II: District-wise Information 23 v List of Exhibits Exhibit 1 Financial Inclusion Indicators Exhibit 2 State Profile of Kerala Exhibit 3 Overview on Access points and related indicators Exhibit 4 Access Points by Institution Type Exhibit 5 Outreach of Various Financial Institutions Exhibit 6 Top 10 Commercial Banks in Kerala Exhibit 7 % Share of Different Types of Banks in Credit and Deposits Exhibit 8 Spread of MFIs Exhibit 9 District-wise Branch and ATM Network of all Institutions Exhibit 10 Coverage Ratio of All FSPs Exhibit 11 District-wise population coverage ratio Exhibit 12 District-wise Coverage Ratio – All FSPs and Banks Exhibit 13 District-wise Coverage Ratio – Post Offices Exhibit 14 Share of Districts in Credit, Deposits and Population Exhibit 15 District-wise Share in Credit Accounts by Banks and MFIs Exhibit 16 District-wise Share in Desposit Accounts by Banks Exhibit 17 Number of Accounts per Household Exhibit 18 Credit Deposit Ratio by District Exhibit 19 Bank group wise Financial Intermediation in Idukki and Wayanad Exhibit 20 Association between Population and Spread of Access Points Exhibit 21 Classification of Districts according to Population Share and Access Points Exhibit 22 Association between Population Density and Coverage Ratio of Access Points Exhibit 23 Association between Urbanisation and Coverage Ratio of Access Points Exhibit 24 Association between % Share of District Net Value Added (NVA) and Access Points Exhibit 25 Taluka-wise Population Coverage Ratio of all Access Points: Thiruvananthapuram Exhibit 26 Taluka-wise Population Coverage Ratio of all Access Points: Southern Region Exhibit 27 Demograpic and Geographic Coverage of Financial Services - Comparison vi 1. Introduction As the Global Findex 2014 observed,only 52.8% of the adult population in India has access to bank accounts. Additionally, only 43% of adults with a bank account made deposits in the previous year. Unsurprisingly, the level of financial inclusion (FI) within India varies from state to state, with southern states being more financially inclusive than many of the central, eastern and northeastern states. As per CRISIL Inclusix 20141, an index which measures the level of financial inclusion, 45 of the 50 most inclusive districts were from the southern states of Kerala and Tamil Nadu, whereas the majority of the 50 least inclusive districts were from the northeastern and central states. Kerala and Goa, as well as the union territories of Chandigarh, Puducherry and Lakshadweep, have recently been declared 100% financially included in terms of coverage of all households with at least one bank account. As the Annual Report 2014-15 of the Reserve Bank of India (RBI) shows, there are 398 million basic savings bank deposit accounts (BSBDA) as on 31st March2015 (including 147 million accounts under the Jan Dhan Yojana). According to the 2011 Census records,there are 247 million households in India.This should mean that every household in the country has at least one bank account. This, however, is not the case. A large chunk of the BSBDAs are dormant or inoperative. A recent estimate shows that the percentage of active debit cards attached to BSDBAs vary from 5-8% in the case of private banks and 27% in the case of large public sector banks2. Further, many individuals hold multiple bank accounts. The publication by MIX, Mapping Financial Access: Deposit-taking in India suggests that on a median level there are 5.16 bank accounts per household in India. What is important to note is that half of the states have values lower than the average. A more critical question is whether bank account per household is the best metric to measure financial inclusion considering the diversity of institutional options available for individuals to link to the financial market. Measuring financial inclusion only as a bank-led phenomenon limits the understanding of the role played by other financial service operators like microfinance institutions (MFIs that have 39 million loan accounts on their books spread across 503 of the 642 districts), self-help groups (SHGs) and India Post (that serves over 28 million households and holds 349 million accounts). Also, MFIs are a major channel through which banks meet their priority sector norms, whereas India Post is a major conduit for G2P transfers through its 155,000 access points. To uncover the dynamics of financial inclusion it is important to map the entire landscape covering all the relevant financial service providers (FSPs). While mapping the financial inclusion landscape it needs to be acknowledged that regions differ in terms State of Financial Inclusion in Kerala of physical and social infrastructure, supply of financial access points as also availability of and demand for products and services. Such differences are most likely to affect the pace and pattern of financial inclusion in specific states. It is important, hence, to comprehensively capture data relating to a variety of contextual factors to be able to understand the differential experiences of states in financial inclusion. This would help different institutions to efficiently navigate the